Climate risks loom large as commodity traders tap financier ambiguity

The comment came shortly after he pledged to direct half of his company’s investments into “energy transition projects” within five years.

The statements are striking, for two reasons. Dunand is co-founder and CEO of one of the world’s biggest oil trading firms, Mercuria. And Mercuria has historically shied away from making such public commitments.

Mercuria’s public positioning along environmental lines coincided with one of its peers, Trafigura, changing tack.

Trafigura is one of the more public-facing commodity traders in a sector that is highly opaque. The company promotes itself as being at the forefront of the payment transparency movement and actively publicises its role in the Extractive Industries Transparency Initiative.

Yet, on climate issues, Trafigura is striking a different, less virtuous stance. The company is investing in a vast Arctic oil project while simultaneously touting its renewables business – and making no excuses for doing so. 

“I don’t see any conflict or contradiction at all […] that is our footprint,” Trafigura’s CEO told FT event participants. 

The company also recently pitched a coal mining vehicle with Citigroup and issues oil-backed loans that lock developing countries into future oil production.

Shifting sands

What could be at play here? 

To be clear, unless action proves otherwise, these public positions amount to spin. After all, Mercuria issues oil-backed loans, just like Trafigura. Mercuria is also investing to bring at least one new African oil field on stream when the world cannot afford to do so if it is to achieve net zero by 2050. Similarly, Trafigura only discloses information on a tiny portion of its business, contrary to its public pro-transparency stance.

The shifts in company rhetoric and strategic positioning are likely indicative of a central concern to all traders: access to finance, the lifeblood of the sector, and where to place their bets. Despite some investor commitments to the contrary, money continues to flow to fossil fuel entities, whether oil majors, national oil companies or more secretive private entities like the traders, as well as to agribusinesses linked to deforestation, another key driver of climate change.

The year 2020 saw ESG markets rocket and an enhanced focus on the race to net zero. In this context, three climate-related financial markets are emerging – ‘dirty’, ‘transition’ and ‘green’. Dirty refers to those financiers that are willing to overtly back fossil fuel production and trade with no environmental strings attached. Green refers to those that are targeting “green” companies or projects, though the EU’s efforts to define what constitutes green are yet to be completed and a topic of much contention, and greenwashing is rife.

The third category – transition – refers to financiers that are happy to back fossil fuel companies, provided they declare climate-related targets. There might be a discount or penalty built in, depending on whether the company meets those targets. Yet, these targets are often vague, weak and lack independent oversight. A group of banks recently renewed Trafigura’s $5.5 billion credit line with a discount if the company reduces or offsets only a portion of its emissions, for example. 

Betting on finance

Each company’s public positioning broadly tracks these three finance lines. Mercuria’s new public stance as a company with a climate compass is likely a bet on finance shifting from dirty to transition and eventually green, for example. 

“The price difference between brown and green product financing transactions is not that important at the moment, but this will shift”, Mercuria’s CFO told FT event participants.

Other traders appear less cautious. Trafigura seems content to drive carbon-intensive investments with few apparent qualms from banks. The CFO of another major commodity trader, Vitol remarked that the company would likely move into oil production as oil majors move out, apparently unconcerned by the impact this could have on the company’s access to finance. In an early sign of this trend, publicly listed Glencore recently announced it was taking over the shares of two mining companies in a Colombian coal mine. 

“We are confident our climate commitments will not be compromised by this partner buy-out”, Glencore commented, placing a big bet that its financiers will agree.  

Drive or delay? No time to waste

In the absence of regulation addressing limitless and risk-blind investment in fossil fuels and climate destructive activities – or even a clear signal from the finance industry that it is unwilling to directly or indirectly bankroll these – there is little evidence to suggest that the commodity trading sector will play its role in driving the energy transition at the pace required. 

Word from the FT event in fact points to the contrary; that traders – along with NOCs – stand ready to pick up the slack as some international mining and oil companies begin to divest, which would mean no absolute reduction of emissions.

The science is clear: there is to be no new oil, gas or coal production if we are to reach net zero by 2050 and global CO2 emissions must halve this decade. Financiers must interrogate action, not commitments, to this end. We must collectively accelerate, not delay, the transition; as the recent UN IPCC report made clear, there is no time to waste.